Misclassification of Drugs, Program Administration, and Program Integrity Updates Under the Medicaid Drug Rebate Program Notice for Proposed Rulemaking (CMS-2434-P)

Misclassification of Drugs, Program Administration, and Program Integrity Updates Under the Medicaid Drug Rebate Program Notice for Proposed Rulemaking (CMS-2434-P)

June 1, 2023, Covington Alert

On May 26, 2023, the Centers for Medicare & Medicaid Services (“CMS”) published the Misclassification of Drugs, Program Administration, and Program Integrity Updates Under the Medicaid Drug Rebate Program Notice for Proposed Rulemaking (CMS-2434-P) (“Proposed Rule”). According to CMS, the Proposed Rule aims to advance policies for the Medicaid Drug Rebate Program (“MDRP”), including proposals to implement new statutory authorities included in the Medicaid Services Investment and Accountability Act of 2019 (“MSIAA”). The Proposed Rule also focuses on enhancing MDRP administration by incorporating policies that would facilitate more accurate and consistent drug information reporting, data collection, and operations. We highlight below select proposals of interest to life sciences companies.

Comments on the Proposed Rule are due on July 25, 2023. The Proposed Rule is available here, and the CMS Fact Sheet is available here.

Proposal to Require Stacking When Determining Best Price

CMS proposes to revise the definition of “best price” to provide that manufacturers must aggregate cumulative discounts, rebates, or other arrangements to determine the final price realized by the manufacturer for a particular unit of a covered outpatient drug (“COD”). The proposed regulatory text is as follows:

The manufacturer must adjust the best price for a drug for a rebate period if cumulative discounts, rebates, or other arrangements to best price eligible entities subsequently adjust the price available from the manufacturer. Cumulative discounts, rebates, or other arrangements must be stacked to determine a final price realized by the manufacturer for a covered outpatient drug, including discounts, rebates, or other arrangements provided to different best price eligible entities.

CMS maintains that the statute should be interpreted broadly because it “refers to a manufacturer’s lowest price ‘available’ ‘to any’ entity on this statutory list.” CMS also indicates that since manufacturers must factor in rebates for multiple entities when computing Average Manufacturer Price (“AMP”), they should do so as well for best price because including rebates in AMP and not best price could result in AMP being lower than best price. Therefore, CMS has determined that best price must incorporate all the discounts and rebates associated with the final price of the COD, even when the buyer does not purchase the drug directly from the manufacturer.

CMS maintains that this proposal is a clarification of its current policy and is also, in part, a response to the court’s decision in United States ex rel. Sheldon v. Allergan Sales, LLC., No. 20-2330 (4th Cir. Jan. 25, 2022)[1] in which the court determined that CMS’ regulatory text regarding the stacking requirement was not sufficiently clear.

Proposal to Enhance Drug Cost Transparency in Medicaid Managed Care Contracts

CMS proposes modifications to address spread pricing by PBMs in Medicaid managed care. Specifically, CMS proposes to facilitate greater transparency by requiring Medicaid managed care plans that administer the drug benefit through subcontractors, including PBMs, contractually to require that the subcontractor report separately “reimbursement for the CODs, payments for other patient services, the dispensing or administering providers[’] fees, and subcontractor administrative fees.” CMS believes that this proposal would increase the accuracy and transparency in Medical Loss Ratios (“MLRs”), which are calculated and reported by managed care plans to develop capitation rates, and thus facilitate more accurate forecasting and payments for Medicaid managed care plans.

CMS acknowledges that the categories proposed for information collection reporting may not reflect how the industry works and may impose burdens not previously considered. Accordingly, CMS explicitly requests feedback on any unintended consequences or other ways that Medicaid managed care plans may obtain or request information from their subcontractors and how plans should structure payment or billing arrangements to address subcontractor fees and spread pricing.

Proposal to Revise Definition of “Manufacturer” for National Drug Rebate Agreement (“NDRA”) Compliance

CMS proposes to amend the regulatory definition of “manufacturer” and proposes to require that a manufacturer must have entered into and have in effect an NDRA as a condition of Medicaid payment for its CODs. CMS proposes that the manufacturer must provide the Agency with all labeler codes for all the manufacturer’s applicable drugs and that “if any manufacturer with a signed rebate agreement in effect that acquires or purchases another labeler, acquires or purchases [CODs] from another labeler code, or forms a new subsidiary, they must ensure that a signed rebate agreement is in effect for these entities or [CODs] consistent with the definition of manufacturer . . . , within the first 30 days of the next full calendar quarter beginning at least 60 days after the acquisition, purchase, asset transfer, or formation of the subsidiary.”

CMS proposes that “all associated labeler entities of the manufacturer that sell prescription drugs, including, but not limited to, owned, acquired, affiliates, brother or sister corporations, operating subsidiaries, franchises, business segments, part of holding companies, divisions, or entities under common corporate ownership or control, must each maintain an effectuated rebate agreement in order for a manufacturer to satisfy the requirement [ ] to have entered into and have in effect a rebate agreement with the Secretary.”

Further, CMS proposes to incorporate a termination clause such that “each associated labeler code of a manufacturer is considered to be part of the single manufacturer, and if any of the associated labeler codes . . . do not have an NDRA in effect, or are terminated, then all of the labeler codes will be subject to termination.”

Proposed Definition of an Internal Investigation for Purposes of Pricing Metric Revisions

CMS previously established a 12-quarter time frame for reporting changes to AMP or best price data, as well as an exception for late submissions. The current regulatory exception permits late submissions, in part, when manufacturers are undergoing "an internal investigation." CMS acknowledges, however, that the current regulations do not define the term “internal investigation,” which has led to varying interpretations.

Accordingly, CMS proposes that, when a manufacturer requests an exception to the 12-quarter rule due to an internal investigation, the manufacturer must make a finding that indicates a violation of statute or regulation in the original report before CMS will contemplate such a request.

Proposal to Establish a Drug Price Verification Survey Process of Certain Reported CODs

CMS proposes to conduct a survey of manufacturers with NDRAs, as well as wholesalers, to verify prices or charges for certain CODs. In order to identify CODs subject to the verification survey, CMS proposes to compile annually a list of single source CODs based on the:

• Highest Medicaid drug spend per claim;
• Highest total Medicaid drug spend;
• Highest 1-year price increase among single source CODs; or
• Highest launch price.

CMS proposes to further refine the initial survey list by excluding CODs of manufacturers that have:

• Participated in any CMS drug pricing program or initiative under which participating manufacturers negotiate a COD’s price directly with CMS (e.g., the Medicare Drug Negotiation Program); or
• Negotiated a CMS-authorized supplemental rebate with at least 50 percent of States that meets certain other criteria related to Medicaid spend.

If more than 10 CODs remain on the survey list after the exclusions, CMS proposes to potentially further refine the list based on:

• State-specific Medicaid program input regarding the manufacturer’s effort to lower drug prices (including subscription models, value-based purchasing arrangements under the multiple best price approach, or other purchasing arrangements favorable to the Medicaid program); or
• Highest cost CODs based on the above factors used to identify the initial list, but before applying the exclusions.

The Agency proposes to publicly post the final survey list on the CMS website. CMS proposes that the verification survey will collect the following information from a manufacturer or wholesaler:

• Pricing, charges, distribution, and utilization data;
• Product and clinical information;
• Costs of production, research, and marketing; and
• Other information as determined by the Secretary to verify the price or charge of the COD.

Further, CMS proposes publicly to post non-proprietary information provided by the manufacturer and wholesaler in response to the verification survey to further validate the information collected and may potentially ask the manufacturer to address the non-proprietary information in a public forum. CMS plans to solicit comments from the public, beneficiaries, State Medicaid agencies, other governmental agencies, and other affected interested parties on the information posted.

Proposal to Modify the Definition of COD

For MDRP purposes, a COD generally is a drug that may be dispensed upon prescription, is approved by the Food and Drug Administration (“FDA”) for safety and effectiveness, and is not provided and billed as part of a bundled service. The statutory definition of COD includes a limiting definition, which excludes certain “drugs, biological products, and insulin provided as part of, or incident to and in the same setting as” certain services. This exclusion applies only when payment may be made as part of payment for the defined service or setting, and not as direct reimbursement for the drug.

In response to stakeholder confusion about the application of the COD limiting definition to direct reimbursement for a drug, CMS proposes to amend the regulatory definition of the term “COD” to specify when a payment is considered direct reimbursement for the drug and to better align the regulatory language with the statute. The proposed regulatory text follows, with the revision italicized:

A covered outpatient drug does not include any drug, biological product, or insulin provided as part of or incident to and in the same setting as any of the services in paragraphs (2)(i) through (viii) of this definition (and for which payment may be made as part of payment for that service and not as direct reimbursement for the drug). Direct reimbursement for a drug may include both reimbursement for a drug alone, or reimbursement for a drug plus the service, in one inclusive payment if the drug and the itemized cost of the drug are separately identified on the claim.

Proposal to Require States to Collect National Drug Codes (“NDCs”) for All Physician-Administered Drugs

CMS proposes to codify the requirement that States collect NDC information on all physician-administered drugs that are CODs in order to invoice manufacturers for rebates and confirm that Medicaid Federal Financial Participation (“FFP”) is available, as appropriate.

Other Proposals of Interest to Life Science Companies

• Identifying and Correcting Misclassified Drug Information: CMS plans to implement new statutory authorities to address issues related to incorrect reporting by manufacturers of drug product information in the MDRP system, including the misclassification of drugs.
• Modifying the Definition of Noninnovator Multiple Source Drug: To align with statutory changes, CMS proposes to amend the regulatory definition of a noninnovator multiple source (“N”) drug to clarify the difference between an innovator multiple source (“I”) drug and an N drug.
• Defining “Market Date”: CMS proposes to define “Market Date,” for the purpose of establishing the base date AMP quarter, as “the date on which the covered outpatient drug was first sold by any manufacturer.”
• Defining Vaccine for the Purposes of the MDRP Only: CMS proposes to define “vaccine” to specify that only vaccines that are preventative in nature are excluded from the definition of COD and thus not subject to Medicaid drug rebates. Vaccines that have a therapeutic effect, meanwhile, would be treated as normal CODs. Specifically, CMS proposes to define “vaccine” for purposes of the MDRP as “a product that is administered prophylactically to induce active, antigen-specific immunity for the prevention of one or more specific infectious diseases and is included in a current or previous FDA published list of vaccines licensed for use in the United States.”
• Removing the Cap on Manufacturer Rebates: CMS proposes to codify amendments made by the American Rescue Plan Act of 2021, which removes the 100% rebate cap on rebate amounts for single source and innovator multiple source drugs.
• Limiting Rebate Dispute Timeframe: CMS proposes to limit the timeframe for manufacturers to initiate an audit or resolve previously disputed State utilization data with respect to rebates owed to 12 quarters from the last day of the quarter from the date of the State invoice.
• Including Medicaid-Specific Identifiers on Pharmacy Cards: CMS proposes to include Medicaid-specific BIN/PCN and group numbers on the pharmacy identification cards issued to the enrollees of Medicaid managed care organizations (“MCOs”), prepaid inpatient health plans (“PIHPs”), or prepaid ambulatory health plans (“PAHPs”), in order to identify patients as Medicaid beneficiaries. CMS believes this inclusion will “ensure that Medicaid benefits are applied appropriately” and “avoid duplicate discounts between Medicaid and the 340B Drug Pricing Program.”

Request for Information

• Issues Relating to Requiring a Diagnosis on Medicaid Prescriptions as a Condition for Claims Payment: CMS is soliciting comments to inform a potential future proposal to require a patient’s diagnosis to be included on a prescription as a condition of a State receiving FFP for that prescription. CMS seeks feedback on the patient care, clinical, and operational impacts of such a proposal, as well as privacy-related concerns, burden considerations, and how to mitigate any anticipated impact on beneficiaries and providers. CMS also requests information on how States could effectuate such a requirement.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Health Care practice.